The Rumors of My Death Were Greatly Exaggerated

We've been on a bit of a hiatus and are back in the saddle. World events have rolled forward in the first few waves we saw last year. Obama swung in with a bang and the public deified him. And there's much to like. He's a mix of races and cultures, intelligent, not so egotistical that it's obnoxious (at least not during this honeymoon period), and is a family man to boot. He hit the ground running and scooped up most of the Clinton era players for his first term. Smart play. But the question on everyone's lips is, "Can he do it?"

And the answer is no. The tsunami is mountainous. It's apocalyptic. The depth of the rot and contagion infecting the world economy is beyond repair. Although his economic team seems relatively competent on the surface, they are shooting spit-wads at elephants. Or perhaps blue wales. The debt levels drowning the European and North American economies are staggering. They dwarf global GDP by several times. We are nearly an order of magnitude more in debt than we produce.  The enormity of it is staggering.

I can digress here and discuss some specific tactics being used to give this some frame. The US is attempting to re-ignite inflation by pushing newly minted cash (aka "liquidity") into banks and lending institutions of all kinds as fast as possible. They are also pushing down the interest rates on bonds, hence lending of all kinds, by buying up US Treasuries. This is a trick called "quantitative easing". It's what a government does when they have dropped their own lending rate to zero (or near zero) but the private market does not want to follow them there. The goal is to make borrowing so cheap that everyone wants to do it.

Will it work? Nope. Never has before. The problem with the current situation is that money is virtually standing still. When money does not change hands it ceases to be an exchange medium and just sits there. The government can dump as much as it can print into the economy. If it isn't getting used there is no effect. Prices begin falling when this occurs creating something called a deflationary spiral. Imagine you are thinking of buying a refrigerator. Your job is shaky and you're not sure if you will have one in a month. You do need the appliance but not so badly that you have to buy it right now. Now imagine that you have seen more and more 50% off sales the last couple of months and a 75% off "going out of business" sale just popped up. You are betting you can get that fridge a lot cheaper if you just wait a couple of months. Maybe even 90% off. So what to do? Well most folks will put off the purchase and buy it for 10 cents on the dollar. Now imagine everyone is doing this. For everything they buy. And it just keeps getting worse and worse.

Now look at the flip side. Businesses don't make much on 50% off sales. They go into the hole when things are 90% off. So they start closing stores and laying off employees. And those idled employees tighten their purse strings and wait for 90% off sales. It becomes a vicious cycle. 

This is what the world governments are trying to avoid. And guess what? It's already far too late to prevent. For those of you into the more exotic financial gauges you can look up the Baltic Dry Index. The BDI is a measure of shipping rates meaning world trade. It's currently sitting at about 10% of its high - meaning world trade is plummeting. Down the rathole. Sinking into the depths of a deflationary spiral. 

But there is some cheery news. All of the money Obama and team have printed and dumped into the economy will have a short term effect. So expect a slight plateau between now and Summer. Call it a respite, or a vacation even. For the short term things are looking OK. But Summer is going to be a bitch. Call it the Summer from hell. Stock up and wait for those 90% off sales. We're all going to need 'em.